Actives Unlocked The ETF advantage - Page 16

JPMAM ’ s Malcolm : Bad news has already been factored into markets

Edward Malcolm , head of UK ETF distribution at JPMAM , speaks to Tom Eckett , editor at ETF Stream , about the key takeaways from the survey results and the firm ’ s market outlook for 2023
What are your key takeaways from these survey results ?
The survey revealed that the direction of travel for markets is pretty muted . This is no surprise given the year we have had with high inflation , geopolitical tensions and heightened volatility .
For me three things were interesting to see . Firstly , the massive shift in allocation to ESG strategies that we have seen in recent years might start to decelerate . Of course , ESG and sustainable investing is still a highly relevant topic . But 60 % of investors said that they would not allocate more , or maintain their position , to ESG ETFs . While more than 40 % of ETF investors still think 2023 will be the ‘ year of ESG ’, more than 50 % do not agree or are unsure – only 8 % anticipated allocating significantly more towards ESG ETFs in the next year . Having enjoyed 60 % of the inflows this year , it will be interesting to see how investors allocate in 2023 .
Secondly , the survey also revealed that investors are still cautious on emerging markets . With regards to China , over 60 % said that they do not expect their allocation to China to grow next year . The same can be said for broader EM investments . Respondents clearly showed that they see more opportunities in developed markets over EM . We think valuations in EM look very compelling , well below their longterm average since 1990 . This could be an attractive entry point if the macro picture looks more promising and investors can select strategies carefully .
And , thirdly , there seems to be a positive sentiment around active management for the year ahead . Some 57 % of respondents agree that 2023 will be the year of active and only 23 % disagree . We tend to agree with this , because with the end of free money , greater two-way risk in inflation and policy and increased return dispersions across assets , it gives active managers more opportunity to add value . Therefore , this could be a good time for investors to look at active ETFs , which combine the benefits of the ETF wrapper with the opportunities of active management .
It seems investors are relatively sanguine on the outlook for 2023 and concerned about an incoming recession . Do you share these sentiments internally ?
We believe that a lot of the bad news for 2023 has been factored into markets , with a moderate recession already priced in . Our base case for 2023 should ultimately be positive for stocks , with moderating inflation allowing the central banks to pause rate hikes and resulting in a relatively mild downturn . Yet with still significant uncertainty around how quickly inflation will improve , further challenges remain likely ahead .
Across fixed income , this year ’ s sell-off has created opportunities
Chapter 1 : Survey results
across the board . In recent times , bonds have provided neither of the two characteristics that they should – income and diversification . Both aspects are now much improved .
For 2023 , all eyes will be on inflation moderating . If inflation remains persistent around current levels , this could dampen our outlook . Fortunately , we believe there are already convincing signs that inflation is set to moderate . In which case , both stocks and bonds look increasingly attractive . We are more excited about bonds than we have been in over a decade .
How do you see the active ETF market developing in Europe over the next 12-18 months ?
We firmly believe that Europe will follow the US market and that active ETFs will gain more market share .
Some 32 % of survey respondents said they will increase their allocation to active ETFs in this timeframe while 10 % will increase an existing allocation but 22 % of the ETF buyers we asked stated they will start allocating to active ETFs for the first time .
Similar results have come out from other ETF surveys . For those investors that prefer the transparency and flexibility of the ETF wrapper but also want to achieve alpha , we firmly believe that active ETFs will play a role in the further growth and adoption of ETFs .

Edward Malcolm

Head of UK ETF distribution at JPMAM
Chapter 4: ESG and Active The ESG landscape in Europe: Current investment trends Equities will continue to dominate ESG asset allocation preferences over the next five years. Over the same period, 40% of ESG investors expect to increase allocations to China and emerging markets. More than half of European professional investors are expecting to use active ETFs over the next five years. E SG continues to be the dominant investment trend in Europe, with ESG ETFs accounting for 60% of all UCITS ETF inflows year to date, as at 31 October according to Bloomberg. Investors continue to rotate out of traditional investment strategies and into ESG ETFs regardless of what is happening in markets. This trend is very likely to continue, according to the J.P. Morgan Asset Management Future Focus survey, which has recently been published. The survey reveals that professional investors in Europe are exploring new avenues for sustainable investing opportunities. But asset allocation drivers are changing, and so are the ways investors are embracing sustainability themes. To assess and understand these evolving dynamics, J.P. Morgan Asset Management surveyed a range of professional investors to understand their future plans, the challenges they are facing, and their thoughts on where the most compelling opportunities can currently be found. When looking at investors’ ESG priorities, the findings showed that environmental issues, and how to address them through portfolio decision-making, remained the highest priority. However, this traditional focus on the environment appears to be evolving, with investors increasingly looking to prioritise social issues as evidence of the financial materiality of social factors continues to accumulate. When asked further about what is driving asset allocation decisions, the survey found that client demand and aligning investments with personal beliefs were the most popular answers. The third most cited reason was end-clients wanting to make a positive impact with a sense of urgency. Importantly, more than a quarter (27%) of the respondents said they were driven by potentially improved risk-adjusted returns, while more than a fifth (22%) also identified “accessing companies that could create long-term value” as an important driver. Chapter 4: ESG and Active When it comes to regional allocations, ESG investors are looking further afield for future opportunities. While ESG allocations towards US equities looks set to remain constant over the next five years, respondents say they are 7% less likely to find opportunities in Europe (ex-UK). The survey also made it clear that emerging markets, including China, may be expected to attract the most interest from European professional investors over the coming years. The survey revealed a seismic shift in portfolio allocation towards emerging markets, with 40% of respondents showing interest in the area in five years’ time (26% plan to allocate over the next year). We asked respondents how they plan to use various investment vehicles to access ESG in the short term (over the next 12 months) versus the medium term (the next five years). The survey suggests that change is coming, with 51% of respondents planning to increase their use of active ETFs to gain exposure to ESG opportunities over the next five years, compared to 43% over the next year.exposure. However, with a challenging outlook for equity markets, investors also need the opportunity to earn excess returns as part of a diversified portfolio. Passive ESG ETFs typically apply exclusions or, if a sharper ESG focus is required, they track ESG indices such as socially responsible, or Paris-aligned benchmarks. By selecting a passive ESG ETF, however, investors are fully reliant on the index providers’ ESG analysis, which is necessarily based on backwards-looking data. Unlike ESG investing with active ETFs There is now a large offering of indexed ESG ETFs available for investors. Indexed ETF strategies provide predictable, cost-effective core solutions for investors looking to build efficient broad market 51% passive index investing, an active approach allows for a more in- depth assessment of ESG characteristics, and for a more forward-looking qualitative judgement to be made. While index trackers can exclude certain categories and may seek to influence companies through proxy voting, our active investment teams embed ESG considerations throughout the investment process and engage with companies to create value, potentially enhancing risk-adjusted returns over the long term. At J.P. Morgan Asset Management, our active ESG ETFs draw on the insight and in-house data of our global research teams, and leverage the scale and reach of our investment stewardship programme. We offer more than 15 ESG ETFs classified as Article 8 or 9 under the SFDR regulation. From core building blocks with robust ESG frameworks to targeted thematic solutions, investors can choose from a wide range of J.P. Morgan ESG ETFs to express sustainability preferences in their portfolios. Active J.P. Morgan AM ETFs ETFInceptionTERAsset ClassStrategySFDR JPM Global Research Enhanced Index Equity (ESG) UCITS ETF*, **10/10/20180.25%EquityActiveArticle 8 JPM US Research Enhanced Index Equity (ESG) UCITS ETF*;**10/10/20180.20%EquityActiveArticle 8 JPM Europe Research Enhanced Index Equity (ESG) UCITS ETF*, **10/10/20180.25%EquityActiveArticle 8 JPM Global Emerging Markets Research Enhanced Index Equity (ESG) UCITS ETF*, **06/12/20180.30%EquityActiveArticle 8 JPM Climate Change Solutions UCITS ETF**14/06/20220.55%EquityActiveArticle 9 JPM USD Corporate Bond Research Enhanced Index (ESG) UCITS ETF*, **06/12/20180.19%Fixed IncomeActiveArticle 8 JPM EUR Corporate Bond Research Enhanced Index (ESG) UCITS ETF*, **06/12/20180.19%Fixed IncomeActiveArticle 8 JPM EUR Ultra-Short Income UCITS ETF**06/06/20180.08%Fixed IncomeActiveArticle 8 JPM GBP Ultra-Short Income UCITS ETF**06/06/20180.10%Fixed IncomeActiveArticle 8 Available share classes are country dependent. Please contact your client advisor for further details. DISCLAIMER * FOR FRANCE ONLY: Investors should note that, relative to the expectations of the Autorité des Marchés Financiers, this ETF presents disproportionate communication on the consideration of non-financial criteria in its investment policy. ** FOR BELGIUM ONLY: Please note the acc share class of the ETF marked with an asterisk (*) in this page are not registered in Belgium and can only be accessible for professional clients. Please contact your J.P. Morgan Asset Management representative for further information. The offering of Shares has not been and will not be notified to the Belgian Financial Services and Markets Authority (Autoriteit voor Financiële Diensten en Markten/Autorité des Services et Marchés Financiers) nor has this document been, nor will it be, approved by the Financial Services and Markets Authority. This document may be distributed in Belgium only to such investors for their personal use and exclusively for the purposes of this offering of Shares. Accordingly, this document may not be used for any other purpose nor passed on to any other investor in Belgium. of respondents planning to increase their use of active ETFs to gain exposure to ESG opportunities over the next five years 16 17